Switzerland: The application of a double tax treaty needs to be confirmed with all relevant tax authorities

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Switzerland: The application of a double tax treaty needs to be confirmed with all relevant tax authorities

poltera.jpg

lagana.jpg

Flurin Poltera


Stefan Laganà

In a recent case an investor acquired Swiss real estate via a Luxembourg holding company with the intention of achieving both tax efficient profit repatriation and tax efficient exit in regard to his investment. The Swiss – Luxembourg double tax treaty (Swiss-Lux DTT) – as do many of the more than 90 double tax treaties Switzerland has in force – foresees a 0% residual withholding tax on dividends if a minimum shareholding is met. The investor filed a ruling request with the Swiss Federal Tax Administration (SFTA) which confirmed the substance requirements for the application of the Swiss – Lux DTT and the zero withholding tax on dividends are met. The Swiss – Lux DTT does not contain paragraph 4 of article 13 of the OECD Model Tax Convention, which would allow the property country (Switzerland) to tax capital gains of real estate companies in case of an exit. Luxembourg has, therefore, the right to tax a capital gain of the Luxembourg holding company on the sale of its Swiss real estate company, if the treaty applies.

In relation to capital gains it is important to understand that the competence to assess income taxes, even federal income taxes, in Switzerland is with the cantonal tax authorities; for real estate tax in certain instances with the communal authorities. Different authorities can come to different conclusions in assessing the tax consequences of a certain transaction from their angle of responsibility.

In the case of the above-mentioned investor, the cantonal tax authorities considered the ruling granted by the SFTA for withholding tax purposes as not binding for cantonal tax purposes. They took the position that the Luxembourg holding company did not meet the substance requirement under the Swiss-Lux DTT for purposes of the real estate gains tax and that therefore the capital gain was subject to taxation in Switzerland. The decision was upheld by the cantonal court.

The SFTA recently tightened their practice in relation to substance requirements, allegedly considering international tax developments, in particular the OECD initiative on base erosion and profit shifting (BEPS). While there are no official guidelines or formal substance requirements, recent experience showed that the SFTA, in addition to the 30% minimum equity requirement for holding companies, requires a real nexus to the country of the holding company and is putting more emphasis on operational substance and some economic rationale for choosing the holding jurisdiction. The tightened practice must be carefully considered when implementing international holding structures.

The case described above clearly demonstrates that it is important to review existing structures for two reasons: to consider whether companies are compliant with substance requirements and, particularly in the case of real estate investments, to assess whether for a particular structure an additional ruling may be recommendable for real estate gains taxes with the cantonal tax authorities to ensure and safeguard the tax efficiency of the structure.

Flurin Poltera (fpoltera@deloitte.ch) and Stefan Laganà (slagana@deloitte.ch)

Deloitte

Tel: +41 58 279 7217 and +41 58 279 6313

Website: www.deloitte.ch

more across site & shared bottom lb ros

More from across our site

The US’s GILTI regime will not be forced upon American multinationals in foreign jurisdictions, Bloomberg has reported; in other news, Ropes & Gray hired two tax partners from Linklaters
APAs should provide a pragmatic means to agree to an arm's-length outcome for an Australian entity and for the ATO, the tax authority said
Overall revenues and average profit per partner also increased in the UK, the ‘big four’ firm revealed
Increasingly complex reporting requirements contributed towards the firm’s growth in tax, it said
Sector-specific business taxes, private equity tax treatment reform and changes to the taxation of non-residents are all on the cards for the UK, authors from Herbert Smith Freehills Kramer predict
The UK’s Labour government has an unpopular prime minister, an unpopular chancellor and not a lot of good options as it prepares to deliver its autumn Budget
Awards
The firms picked up five major awards between them at a gala ceremony held at New York’s prestigious Metropolitan Club
The streaming company’s operating income was $400m below expectations following the dispute; in other news, the OECD has released updates for 25 TP country profiles
Software company Oracle has won the right to have its A$250m dispute with the ATO stayed, paving the way for a mutual agreement procedure
If the US doesn't participate in pillar two then global consensus on the project can’t be a reality, tax academic René Matteotti also suggests
Gift this article